Trouble for South African homeowners with bonds

Despite declining inflation and interest rates, homeowners with bonds are still under financial strain, as evidenced by the increase in overdue home loan payments.

This is according to research and analytics firm Eight20’s latest Credit Stress Report for the fourth quarter of 2024.

The report noted that overdue balances remain concerningly high. Two in particular were home loan overdue balances, up 23% year-on-year, and Credit Card overdue balances, up 13% year-on-year. 

It highlighted that the outstanding balance on all loans was up 1.3% quarter-on-quarter at R2.5 trillion, with overdue balances increasing by 3% quarter-on-quarter to R200 billion.

“These levels of growth in overdue balances are concentrated in the three wealthiest segments, suggesting that South African consumers are quite distressed.

“Even the top end of income earners is struggling despite lower inflation and two cuts in interest rates,” said Eighty20.

The report explained that the increase in overdue balances was primarily driven by a R1.9 billion increase (2% QoQ) in the overdue balance of unsecured loans.

Additionally, the report noted a R1.7 billion increase (5% QoQ) in the overdue balance of credit cards and the overdue balances of VAF, which remained stable this quarter at R15.9 billion.

The significant growth in credit card and retail loans, alongside the increase in overdue balances, suggests that consumers are still under financial pressure.

“It suggests that consumers are extensively utilising these products to cope with financial challenges such as rising prices and stagnant wages,” the report said.

“The data underscores a dependence on high-interest, unsecured credit products in a challenging economic environment,” it added.

The report further revealed that the overall instalment-to-net income ratio for all South Africans is 30%. This means that almost a third of the net income of all credit-active people goes towards servicing debt.

The ratio is highest for the Heavy Hitters, at 48% of income going to instalments, followed by the Middle Class at 38%.

The report added that Mass Credit Market pays 19% of its income towards debt, with Comfortable Retirees paying 21%.

Eighty20 defines Heavy hitters as the wealthiest 5% of the population, have more assets than any other segment, are mostly male, have high internet penetration and do lots of shopping.

These income earners’ current debt load is more than seven times that of the Middle-Class Workers segment.

Middle-class workers comprise the 4.1 million middle-income, credit-active population with families, mortgages, and frequent shopping trips.

The Mass Credit Market comprises the employed, lower middle class, mostly female, 82% of whom have retail store accounts and 1/5th who have credit cards.

Eighty20 also defines Comfortable Retirees as older, high-income credit active, asset-rich ex-professionals and middle-class consumers.

DebtBusters noted a similar trend of home loan stress in their latest report. It showed that those earning more than R35,000 a month spend 74% of their monthly take-home pay to service their debt repayments.

Debtbuster added that the indebtedness of these income earners was predominantly due to home loans and vehicle asset finance debt.

Adding to the concern is the country’s proposed value-added tax (VAT) hikes, which experts noted could mean homebuyers would have to pay even more.

MyProperty Home Loans bond originator Michael-Anne Abrahams warned that potential home buyers could see significant changes in the costs of purchasing properties, especially new homes if the VAT hike happens.

Abrahams warned that the postponed Budget’s proposed tax adjustment would shift the financial landscape for new constructions, existing home transactions, and accompanying services. 

Abrahams said the VAT increase would affect all VAT-inclusive services linked to home buying, such as attorney fees, estate agent commissions, and home loan registration fees. 

“Although the direct cost of the home may not change, buyers will feel the pinch when it comes to the associated services, all of which will see a price increase due to the VAT hike,” she explained.

She added that the cumulative effect of increased service costs can extend to homeownership’s overall affordability. 

“Prospective buyers might find their budget squeezed, forcing them to qualify for smaller home loans or adjust their home buying plans,” she said.